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4.1 - 4 Govt Intervention
4.1 - 4 Govt Intervention
MEN
U
The public sector in every economy plays a major role, as a producer and employer.
Governments work locally, nationally and internationally. Here are the roles they play in the
economy:
if it exports too little and imports too much, the economy may run out of foreign currency
to buy further imports
a BoP deficit causes the value of its currency to fall against other foreign currencies and
make imports more expensive to buy, while a BoP surplus causes its currency to rise
against other foreign currencies and make its exports more expensive in the international
market.
Income Redistribution: to reduce the inequality of income among its citizens, the
government will redistribute incomes from the rich to the poor by imposing taxes on the rich
and using it to finance welfare schemes for the poor. All governments struggle with income
inequality and try to solve it because:
widening inequality means higher levels of poverty
poverty and hardship restricts the economy from reaching its maximum productive
capacity.
Conflict of Macroeconomic Aims
When a policy is introduced to achieve one macroeconomic aim, it tends to conflict with one or
more other aims. In other words, as one aim is achieved, another aim is undone. Let’s look at
some conflicts of government macroeconomic aims.
In the long run, when economic growth is continuous, firms may start investing in more capital
(machinery/equipment). More capital-intensive production will make a lot of people
unemployed.
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